Present Value: The maximum amount a person is willing to pay today to receive a payment in the future.
Present Value and interest rates
The present value of a given payment in the future decreases as the interest rate increases.
When interest rates fall, the present value of a given payment in the future increases.
The present value—the value today—of a given payment in the future is the maximum amount a person is willing to pay today for that payment.
As the interest rate increases, the opportunity cost of your funds also increases, so
the present value of a given payment in the future falls. In other words, you need
less money today to get to your future “money goal.”
As the interest rate decreases, the opportunity cost of your funds also decreases, so the present value of a given payment in the future rises. In other words, you need more money today to get to your money goal.
Liquid: Easily convertible into money on short notice.
Funds deposited in a bank account, provide a source of liquidity for households because they can be withdrawn at any time.
Managers are gambling that their vision of the future will come true and make their vast profits.
Society would not be able to turn its savings into profitable investment projects.
Financial intermediaries: Organizations that receive funds from savers and channel them to investors.
These institutions accept funds from savers and make loans to businesses and individuals.
Savings and loan institutions will accept deposits in savings accounts and use these funds to make loans, often for housing.
Issuance companies lend the premiums received to earn returns from investments so they can pay off the insurance claims of individuals.
In normal circumstances, not all households withdraw their money at the same time, so financial intermediaries can lend out most of the money and still have enough on hand to meet withdrawals by depositors.
By independent, it means the return from one investment is unrelated to the return on another investment.
Securitization: The practice of purchasing loans, repackaging them, and selling them to the financial markets.
Leverage: Using borrowed funds to purchase assets.
Increases in leverage increase the risk that financial intermediaries undertake because they are obligated to pay off the funds they have borrowed, regardless of the actual performance of the assets they have purchased.